Who gets the urban surplus?

Abstract

High productivity in cities creates an economic surplus relative to other areas. How is this divided between workers and landowners? Simple models with homogenous labour suggest that it accrues largely—or entirely—in the form of land rents. This article shows that heterogeneity of labour in two main dimensions (productivity differentials and housing demands) radically changes this result. Even a modest amount of heterogeneity can drive the land share of surplus down to two-thirds or lower, as high productivity and/or low housing demand individuals receive large utility gains. It follows that land value appreciation understates the value of urban amenities and infrastructure. In a system of cities the sorting of workers across cities means that, while total rent is highest, the rent share of surplus is lowest in the largest and most productive cities.